Peter Thiel (Facebook Board of Directors) – Ronald Reagan National Defense Forum (Dec 2019)

Chapters

Abstract

Venture Capital’s Role in Shaping Defense Technology: Bridging Silicon Valley and Military Innovation

The interplay between venture capital and the defense sector marks a pivotal juncture in technological advancements and national security strategies. This comprehensive exploration delves into how venture capital (VC) drives public-private partnerships and innovation within the defense industry, particularly in areas like AI and cyber. It highlights the Department of Defense’s (DoD) efforts in fostering environments conducive to commercial and defense collaborations, the challenges faced by startups in aligning with military needs, and the strategic implications of this synergy against the backdrop of global power shifts, notably the rise of China.

Main Body:

Venture Capital’s Impact on Defense: Harnessing American Innovation

Venture capital significantly influences the defense sector, providing essential funding and expertise to startups developing cutting-edge technologies. This facilitates the DoD’s learning from industry practices, enhances budget efficiency, and fosters closer ties between the tech community and defense operations. Lisa Hirschman, Acting Chief Management Officer for the U.S. Department of Defense, emphasizes the importance of public-private partnerships to benchmark industry practices and apply innovative approaches within the Department of Defense. Secretary Esper, in his keynote speech, highlighted the need to be mindful of every dollar spent, ensuring high returns and efficient utilization of resources.

Venture Capital Model and Defense Industry

In the VC model, investors target startups with potential for exponential growth, but the unique dynamics of the defense industry, with its prolonged timelines and specific challenges, often conflict with the traditional VC model focused on rapid returns. Venture capitalists invest in businesses with the potential to become multi-billion-dollar future businesses. The model does not work well for businesses that are worth less than a billion dollars. Venture capitalists invest in companies that can start small but have the potential to scale to a world-class level. SpaceX and Palantir have proven that it is possible to create successful companies in the defense industry. Both companies took a long time to get significant contracts from the U.S. military. They were not conventionally venture fundable and relied on personal funding from their founders. The long time horizons and lack of funding opportunities make it difficult for startups to succeed in the defense industry. Top engineers and talent are attracted to high-growth, early-stage companies with the potential for significant financial rewards.

DIU’s Role and Key Points

The Defense Innovation Unit (DIU) plays a vital role in easing the entry of startups into the defense market. DIU can play a role in making it easier for companies to pursue defense as a vertical while also pursuing other markets. It emphasizes the need for the DoD to adopt agile industry concepts and to address market risks and stereotypes that deter VC investment in defense technologies.

Shifting Dynamics and Ethical Considerations

The rise of China as a technological and geopolitical rival intensifies the global tech race, especially in AI and space exploration. Ethical considerations, exemplified by Google’s controversial decision regarding Project Maven, emphasize the need for careful navigation of military applications of AI.

Cultural Differences and Historical Context

Silicon Valley’s detachment from its military roots contrasts with the more defense-oriented perspective of Seattle-based companies, affecting their willingness to collaborate on defense projects.

The U.S. Military’s Role in Global Security

The U.S. military’s contributions to global stability and humanitarian efforts are often underappreciated, highlighting the need for public-private collaborations to maintain technological superiority.

China’s Strategic Approach:

China’s strategy of blending market incentives with political control aims to undermine U.S. industrial capacity and dominate key technological sectors, presenting a significant challenge to U.S. defense strategies.

Navigating the New Technology Landscape:

The DoD is focusing on establishing clear rules for the use of emerging technologies, emphasizing the importance of public-private partnerships for accessing innovation.

Speed and Agility:

The military’s need for speed and agility in operations requires a nimble approach, balancing rapid adaptation with scalable solutions.

Process Reform:

Streamlining processes and policies is crucial for optimizing efficiency and effectiveness within the defense sector, including automating tasks wherever possible.

Liquidity Events in VC Investments:

Liquidity events are pivotal for realizing investment gains, but startups in the national security sector often face delays in these events due to the industry’s unique challenges.

Challenges of Integrating Silicon Valley and the Military:

The distinct cultures of the military and Silicon Valley, along with procurement and budgetary constraints, pose significant challenges to their integration. Long-term funding mismatches further complicate collaboration.

Strategies for Collaboration:

The DIU and programs like Look-See foster collaboration by bridging the gap between military needs and Silicon Valley innovations. Recruiting talent from the tech sector is also a key strategy.

Benefits of Collaboration:

Collaboration offers access to cutting-edge technologies, increased speed and agility in military operations, and potential cost savings.

Government Incentives and Startup Dynamics:

Government incentives are crucial to encourage innovation and reduce friction in defense collaborations. The dynamics between startups and traditional defense primes, and the challenges of maintaining an innovative culture post-acquisition, are critical considerations.

Politics and Talent:

The political environment and talent preferences play significant roles in the technology acquisition landscape, affecting decisions and strategies in the defense sector.

Tech Acquisition and Startups:

The consolidation in defense and aerospace has seen limited tech acquisitions, partly due to the emergence of new companies like Anduril and the complexities involved.

Chinese Investment and National Security:

Chinese investment in U.S. venture capital has raised national security concerns, leading to regulatory reforms. However, effective implementation of these reforms remains a work in progress.



The intersection of venture capital and defense technology is a complex but crucial area for national security and technological advancement. Effective collaboration between Silicon Valley and the military is key to navigating this landscape, requiring attention to cultural differences, procurement reform, and long-term funding solutions. By harmonizing these elements, the military can leverage Silicon Valley’s innovations for enhanced capabilities and strategic advantages.

DOD-Industry Partnership:

The DoD is committed to fostering partnerships with companies, particularly in the AI and cyber domains, where commercial opportunities abound. Successful examples of commercial companies expanding into defense business through DOD collaboration exist. A focus on eliminating barriers to entry, simplifying requirements, and embracing agile concepts is crucial to engage more businesses and achieve better outcomes.

Market Risk and Venture Capital:

Market risk is a key concern for venture capitalists investing in defense-focused companies due to stereotypes about the industry’s slow pace, bureaucracy, and political nature. Reducing market risk can help attract more funding for promising technologies and equip warfighters with the best available capabilities.

Acquisition Reform and Contract Management:

The current acquisition and contracting processes within DOD may hinder the participation of companies with the best technologies. Ongoing reform efforts, led by key leaders within DOD, aim to streamline processes, reduce barriers to entry, and improve overall contract management.

U.S. Share of Global R&D Investment:

The U.S. share of global R&D investment has declined from over 60% in 1967 to less than 30% in 2017. China’s share of global R&D spending has surged, becoming larger than the USSR’s during the Cold War.

China’s Impact on Innovation and Funding:

The rise of China as a technological competitor has accelerated the need for innovation and new technologies within the DOD. China’s emergence has forced the U.S. to rethink its approach, emphasizing faster deployment of technologies and more efficient collaboration with industry.

AI as a Dual-Use Technology:

AI is a dual-use technology with both military and civilian applications. The debate about AI’s use in the military has been slow to develop, unlike the debate about nuclear weapons in the 1940s. Google’s decision to withdraw from Project Maven, an AI project with the U.S. military, sparked a debate about AI’s military applications.

Ethical Considerations:

The ethical framing of the debate about AI in the military is problematic. It is always the ethical decision to work with the U.S. government when choosing between the U.S. and China. China’s unethical actions are often hidden and obscured.

Historical Context:

Silicon Valley’s origins are rooted in electronic warfare and defense. The aversion to working on defense-related projects in Silicon Valley is a growing zeitgeist. Companies may pander to this aversion to avoid HR issues and controversies.

Narrative and Zeitgeist:

The lack of a clear and present danger, like the Soviet Union in the 1980s, affects the narrative and zeitgeist of young people. China’s economic and political influence has made it difficult to portray Chinese villains in popular culture. The influx of immigrants who are not fully committed to the U.S. or who transfer intellectual property back to their countries of origin is a problem.

The U.S. Military’s Role:

The U.S. military does a lot of good in the world, including keeping the world safe and providing humanitarian assistance. The Communist Party of China is a repressive regime, and its actions are gaining more visibility. The Project Maven experience is not representative of Silicon Valley’s attitude towards defense.

China’s Economic and Technological Strategy:

China is using market incentives and its repressive political regime to build a successful global economy. Their goal is economic prosperity for China, not just military R&D. China is hollowing out U.S. industrial capacity through its economic strategy.

The DoD’s Perspective:

The DoD recognizes the need to reach out and access technologies being developed commercially. China’s approach to AI and technology is a concern. The DoD is considering public-private partnerships and rules of the road for new technologies.

Process Reform:

The need for change in the rules of the road was emphasized, focusing on speed, agility, and scalability. Reviewing processes and policies to eliminate unnecessary ones and optimize the remaining ones was highlighted. Automating processes whenever possible was seen as crucial to streamlining and increasing efficiency.

Liquidity Events and Startup Timelines:

Liquidity events, such as share purchases, acquisitions, IPOs, and direct listings, were discussed as ways to realize gains in an investment. The trend of startups staying private for longer periods, such as SpaceX and Palantir, was mentioned.

Palantir’s Potential IPO and Timeframe:

The question of whether Palantir will go public and the potential timeframe for such an exit strategy was raised.

Evolution of Startup Timelines:

The shift from the rapid public offerings of the 1990s to the current trend of elongated timelines for startups to go public was discussed. Factors such as increased regulation, availability of private capital, and the desire for significant scale and profitability before going public were cited as contributing to this change.

Notes by: ChannelCapacity999